China economy rebounds from Covid slump as consumer spending picks up

China’s economic activity strengthened in the first two months of the year as investment picked up and consumer spending recovered following the ending of Covid restrictions.
 

Retail sales rose 3.5% from the same period last year, figures from the National Bureau of Statistics showed Wednesday, in line with forecasts and reversing from a 1.8% drop in December. Industrial output growth accelerated to 2.4% in the two-month period, slightly below expectations.

Fixed-asset investment climbed 5.5% during the two-month period, better than the 4.5% estimate and 5.1% growth for the whole of last year. The jobless rate rose to 5.6% following the Lunar New Year holidays, with the rate for young people jumping to a six-month high of 18.1%.

China abruptly dropped its Covid Zero strategy in December, leading to a surge in infections through January. Cases peaked earlier than expected, though, prompting people to travel and spend again and providing a boost to the services sector. Factories also benefited as logistics bottlenecks and restrictions ended.

“The economy’s circulation is increasingly smooth, production and demand improved markedly, and the economy has stabilized and rebounded,” the NBS said in a statement. “But the external environment is increasingly complex, and the problem of insufficient demand is still prominent.”

The bureau usually combines the data releases for the two months of January and February to avoid distortions from the Lunar New Year holiday, which can fall in either month depending on the year.

Chinas CSI 300 Index of stocks gained 0.5% as of 10:16 a.m. local time, while future contracts of 10-year bonds fell 0.1%. The yuan was little changed.

A breakdown of the retail data shows sales of Chinese and western medicine rose the fastest, by 19.3% in the two month period. Sales of petroleum and its products grew 10.9% and catering rose 9.2%.

Investment picked up as local governments boosted sales of special bonds in the first two months of the year to front-load spending in infrastructure. 

What Bloomberg Economics Says...
 

China’s first comprehensive set of “hard” data for the first two months of the year show the recovery is well underway — but isn’t as eye-popping as early survey data suggested. Retail sales swung back to growth, and industrial output accelerated. But the biggest driver was infrastructure investment — raising the risk that the growth spurt is overly dependent on government support.

Chang Shu and David Qu

The rebound will be encouraging news to the top leadership, who have made economic growth a top priority this year. Beijing set a modest target for gross domestic product growth of around 5% for this year, signaling it will avoid any big stimulus through infrastructure investment or the property market. However, a fairly ambitious job creation goal of “around 12 million” suggests policy will remain supportive.

China’s new Premier Li Qiang said Monday the growth target “is not an easy task“ and “requires redoubled efforts.” The nation will prioritize stability in growth, prices and jobs, while seeking to make progress in high-quality development, he said. 

Earlier on Wednesday, the central bank boosted net cash injections into the financial system by the most since December 2020, providing banks with additional liquidity as demand for loans picks up. 

The economy is expected to grow 5.3% this year, according to economists surveyed by Bloomberg. However, a number of risks cloud the outlook, including waning global demand, a struggling property market and rising geopolitical tensions.